Selling Your Business: A Practical Guide to Getting It Done Right
Whether it is the unpacking of the life cycle of a deal or helpful Common Pitfalls sections, this book illustrates how business owners can achieve the business sale they deserve.
Driving Business Value in an Uncertain Economy
How can you ensure your company's financial solvency and value during an economic rollercoaster? This book reveals the key factors that drive business value in any economy
Enhancing Your Business Value...The Climb to the Top
This valuable resource is a strategy guide that inspires you to take action. Use it as an idea generator or a launching pad to guide you in your next steps for improved business growth.
Selling Your Business the Hard Easy Way
From important points to consider prior to selling along with critical pitfalls to avoid during the process, this is the one guide that businesses owners cannot afford to be without.
For more details, to purchase a hard copy Click Here
Tuesday, June 29, 2010
Strategies to Improve Back-Office Efficiency
Companies often struggle with back-office productivity challenges. Figuring out the right way to group tasks and enhance customer value can be complicated. Some managers opt to have employees perform several transactions while others choose a specialization strategy. Understanding which strategy yields the best results can help boost back-office efficiency and the company’s bottom line.
Back-Office Inefficiencies
Back office staff faces a variety of struggles when improving operational efficiency. Customers need change, new products are developed and other situations occur which interferes with production cycles. Companies involved in finance, health care, insurance and other service organizations appear to be at highest risk for back-office efficiency challenges.
Seeking to solve this problem, some companies are investing heavily in training all back office employees to handle numerous types of transactions. This training is expensive, but many companies feel it’s worthwhile, providing more flexibility among employees. For example, when times get really busy, employees were cross-trained to handle back office functions that needed the most help. This approach however isn’t always successful. Despite the large investment, efficiency often continues to decline.
Challenges with Production
When executives studied why efficiency was declining, they found several problems. Employees with dozens of tasks to complete, rather then just a few, experienced difficultly meeting customer’s service expectations. It also made it difficult for management to accurately track and measure employee performance.
There were also other problems when front-line employees were generalist instead of specialists in specific tasks. Employees weren’t encountering specific tasks enough to handle them efficiency and correctly.
Executives also found that some employees were manipulating the system. These employees would only choose the easiest tasks, which delayed the more difficult transactions and damaged customer service. Other employees became upset about this practice which negatively affected teamwork. When customers weren’t getting the more complicated problems handled, this created even greater inefficiencies. Employees had more angry customers to deal with which further affected the back-log of work. When this happens, companies spend more money on overtime to catch up which severely affected the bottom line.
Boosting Efficiency
When faced with this problem, executives knew they needed to make changes quickly to boost efficiency. Executives studied all transactions that employees were currently handling. They allocated these transactions into groups, based on level of difficulty. These groups of transactions were distributed to employee “teams” that handled the same types of assignments each day. This made employees more efficient and created specialists in each transaction type. Employee performance was also easier to track and manage with this strategy.
When developing the “groupings” of transactions, executives made sure the tasks were variable enough that employees wouldn’t become bored with their daily tasks. Executives also created a team of “floaters” who assisted teams experiencing higher than normal transaction volume. These employees helped the existing team work though their back-log which prevented burnout and customer service challenges.
According to the McKinsey Quarterly, these solutions helped companies meet service deadlines and reduce frontline staff and management by 25 percent. They also decreased overtime costs by 90 percent.
The Results
According to the McKinsey Quarterly, this strategy to manage back-office efficiency is similar to power companies using “peaker” plants to handle increases in the demand for energy. Managers creating teams of floaters to handle overflow can work the same way. It will make teams more flexible without all of the productivity “waste.” To make these plans work, the company must spend adequate time understanding how their customer demand works. This will help the company design a more efficient plan for assigning and handling overflow work.
A company must select the right tasks for each specific team. For example, executives might discover if a team takes on assignments A, B and C, they’ll be more productive then handling A and D. To accomplish this, senior managers must look at the context of the assignments. Assignments can be assigned based on the customer segment, level of difficulty, regulation issues or other important factors within your company.
There should also be measures in place that encourage career paths for front-line employees to boost job satisfaction. Those who perform well should have opportunities for more complex team assignments and opportunities for advancement. Having an employee assigned to a very specific task also decreases the learning curve for new employees. An employee can train much quicker on five transactions then thirty transactions.
Evaluating front-line activities and creating ways to streamline these tasks can boost your company’s productivity. It also improves employee moral and gives managers better ways to measure front-line performance. Creating these strategies in your own company can boost your bottom line and increase employee satisfaction.
Resources
Dan Devroye and Andy Eichfeld. “Taming Demand Variability in Back-Office Services.” The McKinsey Quarterly, September 2009.
--------------------------------------------------------------------------------
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Back-Office Inefficiencies
Back office staff faces a variety of struggles when improving operational efficiency. Customers need change, new products are developed and other situations occur which interferes with production cycles. Companies involved in finance, health care, insurance and other service organizations appear to be at highest risk for back-office efficiency challenges.
Seeking to solve this problem, some companies are investing heavily in training all back office employees to handle numerous types of transactions. This training is expensive, but many companies feel it’s worthwhile, providing more flexibility among employees. For example, when times get really busy, employees were cross-trained to handle back office functions that needed the most help. This approach however isn’t always successful. Despite the large investment, efficiency often continues to decline.
Challenges with Production
When executives studied why efficiency was declining, they found several problems. Employees with dozens of tasks to complete, rather then just a few, experienced difficultly meeting customer’s service expectations. It also made it difficult for management to accurately track and measure employee performance.
There were also other problems when front-line employees were generalist instead of specialists in specific tasks. Employees weren’t encountering specific tasks enough to handle them efficiency and correctly.
Executives also found that some employees were manipulating the system. These employees would only choose the easiest tasks, which delayed the more difficult transactions and damaged customer service. Other employees became upset about this practice which negatively affected teamwork. When customers weren’t getting the more complicated problems handled, this created even greater inefficiencies. Employees had more angry customers to deal with which further affected the back-log of work. When this happens, companies spend more money on overtime to catch up which severely affected the bottom line.
Boosting Efficiency
When faced with this problem, executives knew they needed to make changes quickly to boost efficiency. Executives studied all transactions that employees were currently handling. They allocated these transactions into groups, based on level of difficulty. These groups of transactions were distributed to employee “teams” that handled the same types of assignments each day. This made employees more efficient and created specialists in each transaction type. Employee performance was also easier to track and manage with this strategy.
When developing the “groupings” of transactions, executives made sure the tasks were variable enough that employees wouldn’t become bored with their daily tasks. Executives also created a team of “floaters” who assisted teams experiencing higher than normal transaction volume. These employees helped the existing team work though their back-log which prevented burnout and customer service challenges.
According to the McKinsey Quarterly, these solutions helped companies meet service deadlines and reduce frontline staff and management by 25 percent. They also decreased overtime costs by 90 percent.
The Results
According to the McKinsey Quarterly, this strategy to manage back-office efficiency is similar to power companies using “peaker” plants to handle increases in the demand for energy. Managers creating teams of floaters to handle overflow can work the same way. It will make teams more flexible without all of the productivity “waste.” To make these plans work, the company must spend adequate time understanding how their customer demand works. This will help the company design a more efficient plan for assigning and handling overflow work.
A company must select the right tasks for each specific team. For example, executives might discover if a team takes on assignments A, B and C, they’ll be more productive then handling A and D. To accomplish this, senior managers must look at the context of the assignments. Assignments can be assigned based on the customer segment, level of difficulty, regulation issues or other important factors within your company.
There should also be measures in place that encourage career paths for front-line employees to boost job satisfaction. Those who perform well should have opportunities for more complex team assignments and opportunities for advancement. Having an employee assigned to a very specific task also decreases the learning curve for new employees. An employee can train much quicker on five transactions then thirty transactions.
Evaluating front-line activities and creating ways to streamline these tasks can boost your company’s productivity. It also improves employee moral and gives managers better ways to measure front-line performance. Creating these strategies in your own company can boost your bottom line and increase employee satisfaction.
Resources
Dan Devroye and Andy Eichfeld. “Taming Demand Variability in Back-Office Services.” The McKinsey Quarterly, September 2009.
--------------------------------------------------------------------------------
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Developing Talent More Effectively
Most companies know that employees are their most valuable asset. However, developing employee talents and retaining those individuals is a challenge for most employers. As baby boomers reach retirement age, this challenge becomes more important then ever. Trends suggest there will be more competition for talented workers and managers. Creating strategies to develop and retain employees can make a huge difference.
Managerial Challenges
According to the McKinsey Quarterly, there are three major challenges when developing talent, including demographics, rise of the knowledgeable worker and globalization. These challenges are forcing managers to come up with more creative strategies for developing talent.
Developed countries are struggling with a decline in birthrates and increased numbers of people reaching retirement age. However, emerging markets continue to produce a large group of talented young people. Professionals in emerging markets are graduating from universities at twice the rate of developed nations. As this trend continues, managers are looking to emerging markets to recruit new talent.
When tapping into this talent pool, however, companies need to be careful about issues such as English skills, culture issues and the employee’s experience working in a group setting. Weakness is these areas could make it difficult to develop employees to take on leadership roles.
Another group that companies need to consider when evaluating talent is Generation Y. These professionals were born after 1980. They’ve grown up in a generation described as “information overload.” Human Resource professionals explain these professionals desire more job flexibility, freedom, higher rewards and a high level of work life balance. People in this generation are likely to work a few years and switch jobs. This creates a challenge for companies. If they don’t meet this demographic’s needs, they’re faced with very high levels of turnover. As of 2008, this demographic made up 12 percent of the United States workforce.
Generation Y employees are also generally harder to manage then other generations. However, working to meet their needs and develop their talents can make these individuals very valuable to an organization.
Talent Programs
In the past, companies have invested money in expensive programs to develop talent. To the surprise of many executives, these efforts don’t always work well. This is frustrating to managers. Human resources professionals aren’t always heavily involved in these programs, which frustrates these individuals as well.
When evaluating the results of talent development programs, senior managers aren’t sure what went wrong. According to the McKinsey Quarterly, the largest challenge with existing programs is managers perceive the problem as a short-term tactical issue instead of a long-term strategy that requires a large amount of resources.
Collaboration
When looking for ways to improve talent development, companies need to focus more on collaboration between business units. For example, a talented employee might be interested in moving to another business unit. If the company discourages this behavior, the talented employee may look for opportunities outside of the organization. Companies need to put strategies in place for cross-business unit collaboration.
Managers also need to rethink existing talent development strategies. Instead of focusing solely on top performers, they must consider the entire group of employees (each team member’s strengths and abilities). Developing each person, instead of just a select few will make the entire organization stronger. If a person isn’t suited for their existing business unit, perhaps the company can develop their talents in another business unit more suited to their strengths.
Target Each Type of Talent
With a diverse talent pool, it’s important that companies develop a plan that targets each individual talent group. While top performers should continue to be generously rewarded for their achievements, other employees need some attention as well.
These other players are commonly referred to as “B” players because they are capable and consistent performers (yet, not top performers). When given the proper attention, some of these employees have the potential to become top performers. This includes employees that work on the frontline, technical employees and all units of the organization.
Developing Human Resources Teams
Human Resources are an important asset when developing talent. Previously, HR departments were focused on recruiting, training and managing performance. They didn’t have much influence in developing company talent.
HR needs to serve the entire organization in regards to talent recruitment and development instead of just the top tier of management. For example, Proctor and Gamble places aspiring HR managers to work with front-line managers and employees to gain their trust and collaboration. Coca-Cola places top performing managers in human resources positions for a few years to build business skills and forge a partnership.
Senior managers who are struggling with acquiring and retaining talent need to evaluate their strategy. Making changes that focus on retaining talent, recruiting talent and developing all employees within an organization will make the company much stronger.
Resources
Matthew Guthridge, Asmus B. Komm and Emily Lawson. “Making Talent a Strategic Priority.” The McKinsey Quarterly, November 2008.
--------------------------------------------------------------------------------
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Managerial Challenges
According to the McKinsey Quarterly, there are three major challenges when developing talent, including demographics, rise of the knowledgeable worker and globalization. These challenges are forcing managers to come up with more creative strategies for developing talent.
Developed countries are struggling with a decline in birthrates and increased numbers of people reaching retirement age. However, emerging markets continue to produce a large group of talented young people. Professionals in emerging markets are graduating from universities at twice the rate of developed nations. As this trend continues, managers are looking to emerging markets to recruit new talent.
When tapping into this talent pool, however, companies need to be careful about issues such as English skills, culture issues and the employee’s experience working in a group setting. Weakness is these areas could make it difficult to develop employees to take on leadership roles.
Another group that companies need to consider when evaluating talent is Generation Y. These professionals were born after 1980. They’ve grown up in a generation described as “information overload.” Human Resource professionals explain these professionals desire more job flexibility, freedom, higher rewards and a high level of work life balance. People in this generation are likely to work a few years and switch jobs. This creates a challenge for companies. If they don’t meet this demographic’s needs, they’re faced with very high levels of turnover. As of 2008, this demographic made up 12 percent of the United States workforce.
Generation Y employees are also generally harder to manage then other generations. However, working to meet their needs and develop their talents can make these individuals very valuable to an organization.
Talent Programs
In the past, companies have invested money in expensive programs to develop talent. To the surprise of many executives, these efforts don’t always work well. This is frustrating to managers. Human resources professionals aren’t always heavily involved in these programs, which frustrates these individuals as well.
When evaluating the results of talent development programs, senior managers aren’t sure what went wrong. According to the McKinsey Quarterly, the largest challenge with existing programs is managers perceive the problem as a short-term tactical issue instead of a long-term strategy that requires a large amount of resources.
Collaboration
When looking for ways to improve talent development, companies need to focus more on collaboration between business units. For example, a talented employee might be interested in moving to another business unit. If the company discourages this behavior, the talented employee may look for opportunities outside of the organization. Companies need to put strategies in place for cross-business unit collaboration.
Managers also need to rethink existing talent development strategies. Instead of focusing solely on top performers, they must consider the entire group of employees (each team member’s strengths and abilities). Developing each person, instead of just a select few will make the entire organization stronger. If a person isn’t suited for their existing business unit, perhaps the company can develop their talents in another business unit more suited to their strengths.
Target Each Type of Talent
With a diverse talent pool, it’s important that companies develop a plan that targets each individual talent group. While top performers should continue to be generously rewarded for their achievements, other employees need some attention as well.
These other players are commonly referred to as “B” players because they are capable and consistent performers (yet, not top performers). When given the proper attention, some of these employees have the potential to become top performers. This includes employees that work on the frontline, technical employees and all units of the organization.
Developing Human Resources Teams
Human Resources are an important asset when developing talent. Previously, HR departments were focused on recruiting, training and managing performance. They didn’t have much influence in developing company talent.
HR needs to serve the entire organization in regards to talent recruitment and development instead of just the top tier of management. For example, Proctor and Gamble places aspiring HR managers to work with front-line managers and employees to gain their trust and collaboration. Coca-Cola places top performing managers in human resources positions for a few years to build business skills and forge a partnership.
Senior managers who are struggling with acquiring and retaining talent need to evaluate their strategy. Making changes that focus on retaining talent, recruiting talent and developing all employees within an organization will make the company much stronger.
Resources
Matthew Guthridge, Asmus B. Komm and Emily Lawson. “Making Talent a Strategic Priority.” The McKinsey Quarterly, November 2008.
--------------------------------------------------------------------------------
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition” and “Selling Your Business The Practical Guide to Getting It Done Right”. For more information, contact him at 770.399.9512 or by email.
Wednesday, April 7, 2010
Anticipating a Hostile Takeover
Merger and acquisition activities reached record levels in 2007, according to the McKinsey Review. These transactions reached almost $4 trillion worldwide. However, with an increase of these transactions, deals are getting more aggressive. In 2007, $520 billion worth of merger and acquisition activity were “hostile transactions.” This amount beats the previous record for hostile transactions, which was set in 1999. This trend leaves managers wondering, what can I do to better anticipate a hostile takeover?
What Causes Hostile Transactions?
There are a variety of factors that cause hostile transactions, including a loss of trust between shareholders and management. When managers anticipate a hostile takeover, they typically put together a defensive plan to resist the takeover. However, according to the McKinsey Review, this strategy doesn’t necessarily create the most value. Managers are acting in the best interest of keeping the company’s independence, instead of evaluating what’s best for the company’s shareholders.
Serve the Company and Shareholders
Managers should focus on serving both shareholders and preserving long-term independence by acting preemptively. Managers need to recognize what another business owner might see in their company and seize those opportunities themselves. This will provide shareholders value and help protect your company.
To accomplish this, focus on corporate value strategy and creating initiatives that add value to the company. Having these measures in place allows a company to identity financial, operation, strategic and portfolio decisions that might otherwise make a company appealing for hostile takeover.
If you address these areas, your company will be stronger. Outside companies will look elsewhere for deals where they can buy at a low price (because your company will be valued higher).
Companies who don’t successfully implement these strategies will have a difficult time explaining why merger and acquisition activity isn’t in the best interest of the company.
Diagnosing your Company’s Vulnerability
Create strategies that focus on accurately diagnosing your company’s weak spots. For example, a company might be able to improve operations, improve governance and better manage their balance sheet.
Make operational changes: Companies should carefully evaluate opportunities for untapped potential. Find these opportunities by focusing on areas with average performance. Performance targets should be developed to create more operational value. For example, a company might increase efficiency by outsourcing production.
Evaluating your portfolio: Another item to consider is restructuring your portfolio. For example, if you have a large portion of capital that isn’t being maximized, you could be a target.
Focus on improving your portfolio by identifying opportunities to enhance its composition. According to the McKinsey Review, a European telecommunications company focused on diversifying noncore assets (15 to 20 percent of the total corporate value) to operate more efficiently and become less attractive to outside companies.
Make Changes in your Balance Sheet: If a company has an under performing balance sheet, it may become a target. Private equity firms who have long-term cash balances that are normal, high amounts of working capital and a balance sheet that’s underleveraged are more attractive to outside companies.
Management needs to evaluate the balance sheet to determine areas that have capital that can be given up. For example, could you give extra dividends to shareholders? During this process, make sure to retain enough cash to effectively grow the company in the future.
Improving Governance: Companies with weak governance need to focus on improvement. A management group with interests that don’t line up with shareholders creates more vulnerability.
If governance is an issue with your company, focus on strategies to re-align management interests with those of shareholders. Also, work on increasing the transparency of governance. Managers should also focus on communicating their commitment to increase shareholder confidence.
Dealing with Perceptions
Companies also need to address perception issues. Make sure the value of your company is perceived highly. You don’t want other companies thinking they have a lot of opportunity to increase the value after changes are made.
For example, if shareholders lack confidence in management’s ability to deliver value to an organization, a company may be perceived as a target for takeover. Improve communication with investors. Continue to work on improving shareholder earnings. If necessary, a company must take an aggressive approach to building confidence (if there are serious problems with management). This can be achieved by replacing problematic managers.
Focusing on strategies that improve shareholder value and building trust can minimize the chances of a hostile takeover. These measures also make sure a company is aligning their desire to stay independent with providing the most value to shareholders. Although value isn’t always the key driver for Merger and Acquisition activity, when a company has captured all of the opportunities for success, it’s valued higher. This can minimize company appeal and make shareholders happy.
Resources:
Jenny Askfelt Ruud, Johan Nas and Vincenzo Tortorici. “Preempting Hostile Takeovers.” The McKinsey on Finance, Number 24, Summer 2007
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
What Causes Hostile Transactions?
There are a variety of factors that cause hostile transactions, including a loss of trust between shareholders and management. When managers anticipate a hostile takeover, they typically put together a defensive plan to resist the takeover. However, according to the McKinsey Review, this strategy doesn’t necessarily create the most value. Managers are acting in the best interest of keeping the company’s independence, instead of evaluating what’s best for the company’s shareholders.
Serve the Company and Shareholders
Managers should focus on serving both shareholders and preserving long-term independence by acting preemptively. Managers need to recognize what another business owner might see in their company and seize those opportunities themselves. This will provide shareholders value and help protect your company.
To accomplish this, focus on corporate value strategy and creating initiatives that add value to the company. Having these measures in place allows a company to identity financial, operation, strategic and portfolio decisions that might otherwise make a company appealing for hostile takeover.
If you address these areas, your company will be stronger. Outside companies will look elsewhere for deals where they can buy at a low price (because your company will be valued higher).
Companies who don’t successfully implement these strategies will have a difficult time explaining why merger and acquisition activity isn’t in the best interest of the company.
Diagnosing your Company’s Vulnerability
Create strategies that focus on accurately diagnosing your company’s weak spots. For example, a company might be able to improve operations, improve governance and better manage their balance sheet.
Make operational changes: Companies should carefully evaluate opportunities for untapped potential. Find these opportunities by focusing on areas with average performance. Performance targets should be developed to create more operational value. For example, a company might increase efficiency by outsourcing production.
Evaluating your portfolio: Another item to consider is restructuring your portfolio. For example, if you have a large portion of capital that isn’t being maximized, you could be a target.
Focus on improving your portfolio by identifying opportunities to enhance its composition. According to the McKinsey Review, a European telecommunications company focused on diversifying noncore assets (15 to 20 percent of the total corporate value) to operate more efficiently and become less attractive to outside companies.
Make Changes in your Balance Sheet: If a company has an under performing balance sheet, it may become a target. Private equity firms who have long-term cash balances that are normal, high amounts of working capital and a balance sheet that’s underleveraged are more attractive to outside companies.
Management needs to evaluate the balance sheet to determine areas that have capital that can be given up. For example, could you give extra dividends to shareholders? During this process, make sure to retain enough cash to effectively grow the company in the future.
Improving Governance: Companies with weak governance need to focus on improvement. A management group with interests that don’t line up with shareholders creates more vulnerability.
If governance is an issue with your company, focus on strategies to re-align management interests with those of shareholders. Also, work on increasing the transparency of governance. Managers should also focus on communicating their commitment to increase shareholder confidence.
Dealing with Perceptions
Companies also need to address perception issues. Make sure the value of your company is perceived highly. You don’t want other companies thinking they have a lot of opportunity to increase the value after changes are made.
For example, if shareholders lack confidence in management’s ability to deliver value to an organization, a company may be perceived as a target for takeover. Improve communication with investors. Continue to work on improving shareholder earnings. If necessary, a company must take an aggressive approach to building confidence (if there are serious problems with management). This can be achieved by replacing problematic managers.
Focusing on strategies that improve shareholder value and building trust can minimize the chances of a hostile takeover. These measures also make sure a company is aligning their desire to stay independent with providing the most value to shareholders. Although value isn’t always the key driver for Merger and Acquisition activity, when a company has captured all of the opportunities for success, it’s valued higher. This can minimize company appeal and make shareholders happy.
Resources:
Jenny Askfelt Ruud, Johan Nas and Vincenzo Tortorici. “Preempting Hostile Takeovers.” The McKinsey on Finance, Number 24, Summer 2007
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
Creating a More Effective Risk Assessment Strategy
When creating a risk assessment strategy, companies spend a lot of time focusing on direct risks. Indirect risks, which are often overlooked, can have a serious impact on your business. These risks can cause issues with securing raw materials, limit revenue and your ability to compete in the market place.
For example, according to the McKinsey Review, in 2000 there was a lightening storm in New Mexico. It caused a fire which damaged a technology company that produced chips. Millions of mobile phone chips were damaged.
The technology company didn’t just supply one mobile company, it supplied chips to several. All of the companies were scrambling to shift production to suppliers in Japan. However, not all companies were able to make the adjustment quickly. Companies who didn’t move quickly lost serious revenue.
Regardless of your industry, indirect threats cause a ripple effect. It’s not realistic to eliminate these risks altogether, but with proper planning, you can minimize them.
Target the Value Chain
Most companies have a process in place for evaluating their value chain risk. However, companies need to incorporate processes for targeting the most common indirect risks. According to the McKinsey Review, there are four areas that should be examined (called risk cascades), including: competitors, supply chains, distribution channels and customer responses.
Evaluate the Risk of Competitors
When a company has a structure that is seriously different from competitors, they are at higher risk. Although you don’t want to “copy” competitors, if you plan on varying your strategy substantially, you must pay more attention to indirect risks.
Having a completely different strategy from your competitors means if you’re hit by an indirect risk, the competition may be able to capture your share of the market (because their strategy is much different). This can drive down revenue and hurt the company long-term.
Consider Supply Chain Exposure
When creating a strategy, focus on areas of weakness in your supply chain. Are there indirect threats that could interrupt your ability to secure parts and materials? If so, it could create pricing and supply issues. These issues can affect the customer’s ability to access your product, which can drive down sales.
Look out for Distribution Channel Risks
Managers should also spend some time evaluating potential distribution channel risks. These risks can hinder your ability to reach customers, interfere with costs and even pose a threat to your existing business model. For example, the McKinsey Review discuses the bankruptcy of Circuit City in 2008. As the electronic company liquidated, it created price pressure for other companies.
These companies were holding more then $600 million in unpaid receivables at the time. Customers were in “bargain hunting” mode which directly affected other retailers. Companies were forced to drop prices to make sales.
Anticipate Customer Response
Anticipating the response of customers is difficult. With so many factors involved in a purchasing decision, there are plenty of indirect risks associated with this category.
For example, consider the increase in gasoline prices. As this occurred, customers changed their vehicle purchasing behavior. There was a steady decline in the purchase of large vehicles. Automobiles with the ability to achieve better gas mileage experienced an increase in sales. Customers were also more willing to purchase new alternatives, like the Hybrid.
Evaluating your Risk Profile
When creating risk strategies, companies should carefully consider the risk cascades. Anticipating how direct and indirect risks move through the value chain can help companies prevent the “ripple effect” that occurs when indirect risks aren’t considered.
For example, most industrial companies believe they’re in trouble when the price of carbon increases. The McKinsey Review, however, argues that carbon price increases doesn’t always hurt business. In fact, some companies may benefit.
If carbon was more expensive, aluminum would become the material of choice, which could positively impact automobile manufacturing companies. Therefore, some companies might be negatively impacted, while others (like the automotive companies) would see positive results.
Although companies can’t see around every corner, they can be as prepared as possible. Creating the best possible risk assessment by identifying indirect threats can help create more effective, corporate strategies. Risk cascades can help your company create more effective strategies for anticipating future changes and getting ahead of the curve.
Resources:
Eric Lamarre and Martin Pergler. “Risk: Seeing Around the Corner.” The McKinsey Review, October 2009.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
For example, according to the McKinsey Review, in 2000 there was a lightening storm in New Mexico. It caused a fire which damaged a technology company that produced chips. Millions of mobile phone chips were damaged.
The technology company didn’t just supply one mobile company, it supplied chips to several. All of the companies were scrambling to shift production to suppliers in Japan. However, not all companies were able to make the adjustment quickly. Companies who didn’t move quickly lost serious revenue.
Regardless of your industry, indirect threats cause a ripple effect. It’s not realistic to eliminate these risks altogether, but with proper planning, you can minimize them.
Target the Value Chain
Most companies have a process in place for evaluating their value chain risk. However, companies need to incorporate processes for targeting the most common indirect risks. According to the McKinsey Review, there are four areas that should be examined (called risk cascades), including: competitors, supply chains, distribution channels and customer responses.
Evaluate the Risk of Competitors
When a company has a structure that is seriously different from competitors, they are at higher risk. Although you don’t want to “copy” competitors, if you plan on varying your strategy substantially, you must pay more attention to indirect risks.
Having a completely different strategy from your competitors means if you’re hit by an indirect risk, the competition may be able to capture your share of the market (because their strategy is much different). This can drive down revenue and hurt the company long-term.
Consider Supply Chain Exposure
When creating a strategy, focus on areas of weakness in your supply chain. Are there indirect threats that could interrupt your ability to secure parts and materials? If so, it could create pricing and supply issues. These issues can affect the customer’s ability to access your product, which can drive down sales.
Look out for Distribution Channel Risks
Managers should also spend some time evaluating potential distribution channel risks. These risks can hinder your ability to reach customers, interfere with costs and even pose a threat to your existing business model. For example, the McKinsey Review discuses the bankruptcy of Circuit City in 2008. As the electronic company liquidated, it created price pressure for other companies.
These companies were holding more then $600 million in unpaid receivables at the time. Customers were in “bargain hunting” mode which directly affected other retailers. Companies were forced to drop prices to make sales.
Anticipate Customer Response
Anticipating the response of customers is difficult. With so many factors involved in a purchasing decision, there are plenty of indirect risks associated with this category.
For example, consider the increase in gasoline prices. As this occurred, customers changed their vehicle purchasing behavior. There was a steady decline in the purchase of large vehicles. Automobiles with the ability to achieve better gas mileage experienced an increase in sales. Customers were also more willing to purchase new alternatives, like the Hybrid.
Evaluating your Risk Profile
When creating risk strategies, companies should carefully consider the risk cascades. Anticipating how direct and indirect risks move through the value chain can help companies prevent the “ripple effect” that occurs when indirect risks aren’t considered.
For example, most industrial companies believe they’re in trouble when the price of carbon increases. The McKinsey Review, however, argues that carbon price increases doesn’t always hurt business. In fact, some companies may benefit.
If carbon was more expensive, aluminum would become the material of choice, which could positively impact automobile manufacturing companies. Therefore, some companies might be negatively impacted, while others (like the automotive companies) would see positive results.
Although companies can’t see around every corner, they can be as prepared as possible. Creating the best possible risk assessment by identifying indirect threats can help create more effective, corporate strategies. Risk cascades can help your company create more effective strategies for anticipating future changes and getting ahead of the curve.
Resources:
Eric Lamarre and Martin Pergler. “Risk: Seeing Around the Corner.” The McKinsey Review, October 2009.
Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Hard Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or click here to email Mark.
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